Medium-term effects of a long-term protest

CHILE - Report 28 Oct 2019 by Igal Magendzo, Robert Funk and Sebastian Siche

To the deteriorated external environment, we must add the wave of protests. So far, we do not see reasons for major concern, at least from a medium-term macroeconomic perspective, although October’s Index of Economic Activity (IMACEC) will certainly be considerably lower than it might have been. Reconstruction will imply more investment. To that one must add the fiscal impact of the package the government proposed, to try to end the protest. How the package will be financed, if at all, remains unclear. A negative effect on expectations could have adverse effects on aggregate demand.

In any case, before these new domestic developments, the latest data did not show any further deterioration of domestic economic conditions. The Monthly Index of Economic Activity (IMACEC) for August was certainly favorable. Retail sales data in August were positive as well, especially sales of non-durable goods. But manufacturing remains sluggish. In September (more than a month before the protests), business confidence continued to fluctuate around the levels seen since May. The latest news for investment was not particularly positive. The expectations component of the IMCE remained relatively stable, except in mining, where it receded. Imports of capital goods, in turn, remained stable in September.

INE’s labor market data for the June-August moving quarter showed a slight improvement over the previous month, but the labor market remains weak. Unemployment was relatively stable, while employment growth rose. Private payrolls also showed a marginal rebound, mostly explained by public sector jobs. The fall in self-employment persisted.

September’s CPI surprised markets downward, but the surprise concentrated on the unusual and extreme behavior of the prices of two specific products. Different measures of core inflation showed downward movements in their interannual variations, especially those to which the Central Bank pays more attention. While an alert is lit for possible signs of lower inflationary pressures, we should not rush to conclusions, but should wait for more information. As part of the measures to try to solve the current political crisis, the government will reverse the rate hikes to household electricity and to Santiago public transport decreed in October.

The Central Bank in its last meeting cut the Monetary Policy Rate (TPM) by 25 bp, and left the door open for a similar cut in December. We think this is highly likely, and may be the last cut of the current easing cycle. The Central Bank took a vigilant position with respect to what it referred to as “the complex events that have occurred in our country during the last days.” The implications for monetary policy are not obvious. With regard to the evolution of the economy and its fundamentals, according to the Central Bank’s communiqué, everything evolves according to the base scenario of the last Monetary Policy Report.

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